How much money will you need to retire?

I mentioned in my last column that Jacob and Leah were saving for retirement. “But,” Jacob asked, “Can we live a good life and not run out of money?”

Leah added, “How about leaving money for our children?” For starters, your retirement lifestyle will depend on your assets. Bear in mind that people spend the most at the beginning of retirement when they’re healthy, less in the middle years when they can’t travel as much and more at the end of life when health care expenses typically increase. Acknowledge, too, your retirement income may not match your present income.

Now, if like Jacob and Leah you want to leave your entire nest egg to your children, you can live off your interest and dividends. This can get complicated because rates vary from year to year as do inflation and market returns. But say you have savings of $1 million — 60 percent stocks and 40 percent fixed income. Earn 4 percent, and you’ll have $40,000 a year to live on plus Social Security and any pension money. You’ll have to adjust your lifestyle — including where you live — to that income.

Inflation matters because it can erode your purchasing power. Figuring inflation at 3 percent, you’ll need to withdraw $41,200 the second year — or spend less. (Hedging against falling markets and rising inflation is another subject.)

But what if you want to spend down all of your assets? Plan on withdrawing about 4 percent of your savings each year with an annual increase to offset inflation. Your savings should last about 30 years. Retire at 65, and your savings will take you to 95. If you don’t live that long, you’ll leave money in your estate. Live longer, and you’ll run out of money.

“But let’s be honest,” I said to Jacob and Leah. “Life isn’t lived in a straight line. Unforeseen events force us to adapt the best of plans.”

They agreed. “But how do we start planning?” Leah asked.

The most important tool for success consists of a systematic, rational and deliberate process for making decisions. Of course, you can perform an income projection using one of many online retirement-income calculators. However, retirement calculators generally produce linear results. They don’t account for unexpected changes in circumstances. Consulting with a financial adviser offers income projections and generates important discussions to help you come to a comfortable decision.

That being said, here are more key questions that require honest answers: To what degree do you feel you can control your spending each year? Start by examining your current spending. What’s your lifestyle now? If your retirement income is lower than your working income, what can you give up and still live a satisfying life? Remember, too, your retirement income will be finite — if market returns are negative right before or during your first year, this could be a problem requiring adjustments.

“Fine,” Leah said, “but how do we know we can really be happy with a lower income?”

“Try it,” I answered. Take three to six months and live on less. Determine what you really can do without. And consider this: One spouse — or both — can continue working past planned retirement ages. Retirement needn’t be arbitrary. As I’ve written before, many people find their work fulfilling. Often, retirement presents the opportunity to pursue a second career, and it doesn’t have to be full time. Working after 65 is a legitimate option that can be both satisfying and financially advantageous. And even full-time work offers vacations and holidays so you can travel and engage in other costly activities.

Three points to remember:

• To preserve your capital, live on investment income alone but be prepared to modify your lifestyle. To make your savings last 30 years, withdraw 4 percent of your assets from a 60/40 stock/fixed-income portfolio. This includes slightly larger withdrawals each year to offset inflation.

• Develop an effective decision-making process, because the only guarantee in life is change. Quite honestly, a good financial adviser can pay you big dividends.

• Determine how to control spending in retirement by evaluating what is and is not important to you. Budgeting in retirement provides your ultimate safety net.

Realistic expectations can take the fear out of retiring. With a little work, you can plot a course that will lead to a fulfilling retirement.

Next column will cover other retirement considerations and Social Security claiming strategies.


Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or [email protected].